The special obligation bonds are payable from a pledge and lien on
franchise fee revenues levied and collected by the city, pursuant to
Ordinance No. 07-55, granting the electric franchise to Florida Power &
Light Company (FPL), its successors and assigns, or any franchise or
franchises granted in substitution. If franchise fee revenues are
insufficient to fully pay annual debt service, the city covenants and
agrees to budget and appropriate (CB&A) non-ad valorem revenues in an
amount which is equal to the deficiency in the sinking fund for the
applicable fiscal year to the credit of the sinking fund. Such CB&A
shall be cumulative to the extent not paid and shall continue until all
amounts payable under the ordinance have been paid. The amount available
to be budgeted and appropriated to make debt service payments is subject
to the obligation of the city to provide essential services.

The improvement revenue bonds are limited obligations of the FMLC,
payable solely from loan payments made by the city to the FMLC in an
amount equal to debt service. Pursuant to the loan agreement, the city
covenants to annually budget and appropriate (CB&A), by amendment if
necessary, an amount of non-ad valorem revenue sufficient to satisfy its
loan payments.

KEY RATING DRIVERS

The city's 'A' IDR and Negative Outlook reflect weak financial
operations including relying on one-time sources and deferring
obligations to fill budget gaps. The Negative Outlook reflects Fitch's
concerns about the city's use of the series 2015A bonds to fund annual
pension contributions as a form of deficit financing and its ability to
achieve sustainable structural balance.

Fitch's 'A-' rating on the special obligation bonds and the FMLC
refunding and improvement revenue bonds are based on the CB&A of the
city and are rated one notch below the IDR. Non-ad valorem revenues are
ample relative to overall debt service backed by the CB&A and are
diverse in nature. A one-notch distinction on the special obligation
revenue bonds from the IDR reflects the inability to compel the city to
generate non-ad valorem revenues sufficient to pay debt service and the
prior payment requirements of essential government service costs.

The pledged franchise fee revenues of the special obligation bonds are
currently required to be paid solely by one entity, Florida Power &
Light Company (FP&L), pursuant to a franchise fee agreement between FP&L
and the city. Fitch does not believe this pledge enhances credit quality
beyond the level provided by the non-ad valorem covenant.

Economic Resource Base

Hialeah is located in Miami-Dade County immediately north of Miami
International Airport. The city is the sixth largest in the state with
an estimated 2015 population of 237,969, an increase of 5.6% since 2010.

Revenue Framework: 'a' factor assessment

The city's general fund revenues are expected to rebound slightly to
increase with inflation following steep declines during and
post-recession. The city retains significant room under the legal rate
limit.

Expenditure Framework: 'bbb' factor assessment

The city's fixed carrying costs for debt service, pension and other-post
employment benefits (OPEB) are elevated at about 27% of general fund
spending. Fitch believes the city has a limited ability to make
expenditure cuts at the level of preceding years without reducing core
services.

Long-Term Liability Burden: 'aa' factor assessment

The long-term liability burden for debt and the net pension liability
(NPL) is moderate at about 12% of personal income. The city acknowledges
the NPL, while moderate, will continue to be a growing burden on the
resource base without pension reform. The amortization rate of debt is
slightly below average and there is no new money debt planned.

Operating Performance: 'bbb' factor assessment

Structural imbalance due to revenues not keeping pace with expenditures
has eroded reserves and the city's gap-closing capacity. Fitch believes
city's fund balance is in the 'bbb' assessment category based on the
midrange budgetary flexibility and level of historical revenue
volatility.

RATING SENSITIVITIES

BALANCED OPERATIONS: The rating is sensitive to the city's continued
reliance on one-time measures and the use of deficit financing to
support operations. Demonstrated progress during this period of economic
recovery towards reaching structural balance, with recurring revenues
meeting recurring expenses, is the key to maintenance of the current
rating level. Performance contrary to this could lead to a downward
rating pressure in the IDR.

CREDIT PROFILE

Hialeah is located within Miami-Dade County and has access to the
county's broad and diverse labor market. Within city limits, the
commercial sector consists of small businesses, specifically industrial,
light manufacturing, and service related companies. The top 10 taxpayers
make up a minimal 8.2% of fiscal 2015 taxable assessed value (TAV).

Wealth indicators are low with per capita personal income estimated at
about half of the national level. The individual poverty rate at 25.8%
is well above local, state, and national levels. Unemployment rates were
elevated into the double digits during the recession, but have recovered
significantly in recent years to within 1% to 2% of state and national
levels.

Revenue Framework

About a third of the city's general fund revenue comes from property
taxes and another 30% from utility fees and franchise taxes. The city's
taxable assessed value (TAV) remains 30% below the pre-recession peak of
fiscal 2009 after the housing market's drastic decline from 2008 - 2012;
Zillow reports home values declined 50%.

The city's general fund revenue growth has lagged that of both U.S. GDP
growth and inflation over the decade from 2005 - 2015. Prospects for the
future are somewhat brighter and expected to at least track inflation as
the housing market continues to recover and building permit growth leads
to increases in TAV. The 2017 budget reflects a third year of solid TAV
increases.

Property taxes are subject to a statutory limit of 10 mills. The city's
rate is well below the cap at 6.3 mills adopted for fiscal 2016. Fitch
estimates that an increase of the levy to the maximum legal rate would
generate roughly $26 million in additional revenue, the equivalent of
nearly 20% of the total general fund budget.

Annual changes in the property tax rate are determined using a roll-back
or revenue neutral rate, which is then adjusted for changes in the
Florida per capita personal income. However, this limitation may be
overridden by vote of the county governing body. The city also has the
ability to increase various license and permit revenues and service
charges that make up a smaller but still notable portion of its revenue
base.

Expenditure Framework

The city's main general fund expenditure is for public safety, which
makes up nearly 70% of the spending.

Fitch expects the city's natural pace of spending will increase ahead of
revenues due to the slow pace of revenue growth and expectations for
benefit costs to rise.

Fixed carrying costs for debt service, actuarially required pension
contributions, and OPEB actual payments are a high 27% of total
governmental spending in fiscal 2015. The pension contribution on its
own was 15% of spending and, absent reform, is expected to grow
significantly in the next several years due to a combination of the
plan's poor investment returns and actuarial assumptions changes
required by the state.

The city engages in collective bargaining with three labor groups
representing general employees, police and fire. The city council
retains the ability to impose labor terms and maintains control over
headcount. From a practical perspective Fitch believes that flexibility
around personnel spending may be somewhat constrained as the size of the
citywide workforce has already decreased significantly; headcount is
down over 30% from pre-recession peak levels.

Long-Term Liability Burden

The city's long-term liability burden is about 12% of personal income
including pension and debt. Direct debt is a minor portion of the
long-term liability burden as the majority of debt is overlapping debt
of Miami-Dade County and the school district. The city is paying down
45% of existing debt within 10 years and has no plans to issue debt.
Reported capital needs are minimal, though the city does not create a
formal capital improvement program.

A growing portion of the city's liability burden is associated with the
defined benefit pension plans. The primary plan is the Public Employees
Retirement system (PERS) plan and a secondary plan is for a small number
of certain elected officials. The NPL for the plans as of Oct. 1, 2010
was $164 million, but as of Sept. 30, 2015 the NPL has grown to $237
million under the plans' 8% investment rate of return. On a combined
Fitch-adjusted basis at a 7% rate of return the PERS plan assets cover
only 64% of liability. Management continues to seek pension reform from
its employees in the current round of contract negotiations to help
control growing costs and provide potential budget relief for the city.
Effective April 1, 2012, new non-public safety employees participate in
a defined contribution plan, but other assumption changes including the
open amortization and the payroll growth assumption have caused the
liability to continue to increase.

The city offers other post-employment benefits (OPEB) to its retirees
and makes pay-as-you-go contributions. As of the last valuation report
on Oct. 1, 2013, the unfunded liability of $307 million represented
about 5% of personal income.

Operating Performance

Considerable tax base declines coupled with a determination to maintain
or lower existing tax rates during the recession resulted in significant
use of reserves over the last decade. The city implemented spending
controls during the recession by reducing headcount and cutting capital
spending, but the rapidity of the revenue erosion exceeded the city's
ability to maintain structural balance. The city also began budgeting
the underfunding of pensions and relying on one-time revenue including a
large asset sale from the solid waste system that produced the fiscal
2014 surplus. Otherwise, the city spent down fund balance in six of the
last seven audited fiscal years 2009 to 2015. Fitch believes the current
level of reserves includes one-time measures not available to management
to address a future economic downturn and is consistent with a 'bbb'
financial resilience assessment.

In fiscal 2016, in a form of deficit financing, the city issued pension
obligation bonds and used the proceeds to pay the actuarially determined
contribution (ADC) for pension benefits for the year. Additional bond
proceeds of $7 million were reserved in the general fund for future
pension costs. Management estimates that absent the bond proceeds
retained in the general fund, the fiscal 2016 year-end fund balance
would decrease due to a $2-3 million operating deficit. In recent years
the city has used short-term borrowing to make full pension ADC payments
and nearly eliminated paygo capital spending in order to continue to
hold property taxes flat. Management has raised some other fees
including business fees and zoning fees.

The fiscal 2017 budget includes a stable property tax rate at 6.3 mills
on TAV that increased a strong 8.6% over the year to $8.5 billion
generating an additional $4 million in budgeted revenues. The budget
includes cost controls by adding to recent reductions in headcount,
though ultimately appropriates $3.2 million of reserves from those
earmarked to pay increased pension contributions. Management highlights
the importance of continued pension reform in the ongoing labor
negotiations in all three of the city's employee bargaining unions whose
contracts expired in fiscal 2016 in order to meet projected annual
increases in the pension ADC. About $575 thousand in capital spending
was included in the budget, primarily for software and computer
equipment.

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